Why Tax Cuts in a Strong Economy Could Hurt in the Long Run

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Passing tax cuts in an already strong economy violates the important fiscal principle, says Jared Bernstein, former chief economist to Vice President Joe Biden, in The Washington Post Wednesday.

“When we close [in] on full economic capacity, as is currently the case, tax revenues as a share of the economy should significantly rise, and deficits should fall,” Bernstein writes. “Instead, revenues have come way down, and deficits have climbed.”

As this chart provided by Bernstein shows, lower unemployment has historically been strongly correlated with falling deficits. But that relationship is no longer in effect in the wake of the GOP tax cuts.

Why does it matter? Bernstein says that the current procyclical policy will make it much harder to meet the fiscal challenges facing the country, especially once the next recession hits. “Based on our aging demographics alone, we’ve long known that we will need more revenue over the next decade, not less,” Bernstein writes. “Add in geopolitical threats, climate change and the damage from increasingly intense storms (which is tied to the warmer climate), infrastructure, the need to push back on poverty and inequality, counter-cyclical fiscal policy that will be needed for the next downturn, and, it’s not hard to understand why a rising deficit at full economic capacity is so ill-advised.”